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12/21/2011 @ 12:54PM1,944 views

Dow Stocks Are Worth Owning in 2012

Even though some Dow companies have issued earnings warnings, many are still worth owning in 2012.

Profit margins for Dow Jones Industrial Average members have widened to 17.5%, close to the 2007 peak of 17.75%. The Great Recession provided corporations the opportunity to cut costs, improve productivity and strengthen balance sheets, enabling them to operate more efficiently than before.

Some investors were jolted by news that Europe’s debt crisis and a slowdown in China is hurting Dow members. Chemical company DuPont (DD) and computer-chip maker Intel (INTC) recently reduced their earnings estimates. Caterpillar (CAT) said last week it expects “improving but slow growth in the developed parts of the world,” an outlook that pummeled shares of the construction-equipment company. Shares of United Technologies (UTX) had a similar reaction last week when management provided 2012 outlook that was below what analysts were looking for due to “moderating economic growth.”

Other Dow companies may highlight those same concerns in the weeks ahead as they introduce 2012 guidance. Still, I recommend owning Dow stocks from a long-term perspective. It may be best to wait to buy Dow stocks until guidance comes out and stock prices are reset, offering a better entry point. The Dow closed up 337 points to 12,103 Tuesday, an increase of 4.5%.

Guidance will be conservative for most Dow companies. A large amount of uncertainty remains, especially with regard to Europe, and no one has an incentive to introduce overzealous earnings estimates. Most management teams learned their lesson in 2008 — it’s far better to beat conservative guidance than to miss.

Nevertheless, Dow components are attractively valued, trading at only 12 times forward earnings. That compares to about 16 times earnings in 2008 and 2009, and an average of 17 times over the past decade. On top of that, the average dividend yield is just under 3%, higher than Treasury yields.

Concerning the earnings guidance, it’s important to drill down into individual companies’ situations. DuPont and Intel cited softer business customer demand. Caterpillar, on the other hand, suggested a weak global economy is getting better.

While providing respectable 2012 earnings guidance of 12% to 17%, DuPont moderated its 2011 EPS guidance given slower growth in certain segments due to global economic uncertainty. The company is seeing a slowdown in consumer electronics, and housing and construction markets remain weak.

Intel lowered its fourth-quarter guidance because of a worldwide disk-drive-supply shortage. A broader industry theme seems to be playing out: There is limp demand for PCs.

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